Sunday's (AEDT) 2-1 loss at Nottingham Forest made it five defeats in a row and leaves the club stuck in 22nd on the table, two points from safety and with only 11 matches remaining.
Cotterill replaced Harry Redknapp at St Andrew's in September but won just six games during his tenure, with Birmingham now in serious danger of dropping into the third tier of English football.
"The board would like to place on record their sincere thanks to Steve, not only for his significant contribution at the conclusion of last season for which we will remain grateful, but also for his genuine efforts, contribution and hard work during his tenure in this 2017-2018 campaign," a club statement read.
"Steve has conducted himself professionally on behalf of the club at all times, his work ethic and honesty are a credit to him and there is a genuine sadness at this decision.
"However, the board feel that a change in management at this stage is in the best interests of the football club."
As well as Cotterill, the club also confirmed the departures of first-team coaches Paul Groves and Paul Williams, as well as goalkeeping coach Kevin Hitchcock and director of football Jeff Vetere.